B (4:50)

All right, so as we go ahead and start closing out this discussion of Goldman Sachs, I just want to frame this in the context of the kickoff of earnings season. Is there anything that you saw here in this report that you think will be a theme in the upcoming earnings season? Rachel, let's start with you.

C (5:07)

Yeah, I mean I think there's a few kind of key big picture themes from Goldman's management that might echo across the street this month. I think that starts with the resurgence of the capital markets. I mean CEO David Solomon has very specifically highlighted the firm's leading role in what we're seeing as a very cyclical rebound for advisory and equity underwriting. Now you've got a very high profile IPO pipeline. You've got names like SpaceX and OpenAI that I think are capturing a lot of investor interest right now. And so I do think there's sort of a clear message coming through which is that this very long awaited return to normal for global deal making is seemingly upon us. That could provide a massive tailwind for firms with heavy investment making exposure, of course, like Goldman Sachs. But you know, there's a lot of headwinds in the market right now. So I think we will know a lot more as we get later into the year.

B (5:54)

Jason, how about you?

A (5:55)

So I, you know, I mentioned that Goldman's, it's not like the commercial banks or universal banks out there and in a lot of ways that makes its relationships, because it tends to be more concentrated in its customers, even more important. So I expect that we're going to hear David Solomon and his team, they're really going to lean on those deep relationships with his clients. The track record of results that it's delivered backs up the depth of those relationships and it's precisely for the kinds of uncertainty that we're navigating right now. And I mean it's broad whether it's things like acting as a market maker, helping finance trading activity across any assets, assisting with mergers and acquisitions, wealth management and like Rachel was talking about, helping finance and deliver on those big IPOs. This is a business that has the resources to deliver for its clients on whatever its clients goals are. Now one more thing I want to note. It's not like it's other the commercial banks, but it has a growing loan book and it's worth noting that Goldman did increase its credit loss provisions. I think that's probably more due to the growth of the loan book than any concerns about credit quality, but it's very much worth watching broadly as we start hearing from the wells and the B of A and the JP Morgan chases out there. What is credit quality looking like? That's a thing that can give us an idea how the consumer's doing.

B (7:11)

Okay, well, we'll definitely keep an eye on that then as the other banks start reporting in upcoming weeks. After the break, we're going to look at some of the latest developments in the Strait of Hormuz. You're listening to Motley Fool Money.

C (7:24)

Hey, it's Parker Posey. How did I get here? I love improvisation when it comes to acting, but when it comes to a real life plan, I stick to a script. You do the music.

D (7:34)

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B (7:55)

welcome back to Motley Fool MONEY with the Hidden Gems team. We are not a team of geopolitical experts on this show by any stretch of the imagination, but we do want to acknowledge what is happening in the Iran conflict. Over the weekend, talks between the US And Iran in Pakistan broke down. Nothing really came of it. And now we're hearing that the US Intends to block Iranian ports in the Strait of Hormuz. And by the time you're listening to this, it may have already started. Aside from the obvious instability of the region, there are real world economic impacts here. And I think if I'm listening to the show, I just want to know, like, what is the immediate impact of this decision from the US what can I expect? Rachel, let's start with you.

C (8:37)

Yeah, I think there's a few things to be thinking about here. You know, the US Navy is enforcing this blockade as of this morning. There seems to be a particular enforcement mechanism in place for ships that have reportedly paid tolls previously to Iran. It kind of remains to be seen what that looks like in practice. Brett Crude and WTI had already surged past $100 a barrel. You've got analysts at firms like Onyx Capital Group wording we can see you go up to $150 if the standoff continues. And you know, it's worth noting, this isn't really just a paper price hike. It effectively wipes out nearly 1.8 million barrels of Daily Iranian supply from a market that's already reeling from a regional shortfall that's estimated around 11 million barrels. The other thing I think that's important to note, that the Persian Gulf is a primary hub for nitrogen based fertilizers. And that blockade has already caused prices of elements like urea and ammonia to jump by as much as 50%. Well, why does that matter? Urea and ammonia are the lifeblood of modern farm, so they're primary ingredients in nitrogen based fertilizers. Without them, crop yields can drop significantly. That's why we're seeing some grocery supply emergencies. And when the Strait of Hormuz is blocked, the flow of these chemicals stops. And then the cost of growing everything from corn to wheat spikes almost instantly. That's sort of the long term view of what we could continue to see if this blockade lasts.

A (9:52)

Yeah, we think about the Middle east, we think about oil, and to a lesser extent, we think about natural gas. We think about transportation fuels, electricity production, heating, and that sort of thing. But what we don't often think about just as regular people on the street, is the massive infrastructure in petrochemical manufacturing that's happened in those markets. So instead of just shipping oil somewhere else, and then that place gets to make value added, higher margin products, there's a massive amount of that that now takes place in the Middle east. And that's exactly what Rachel's talking about. So it extends even beyond that. And I want to talk about some of those opportunities. You know, there is a real human toll that's happening here, and we're not ignoring that. I think I want to really be clear about that for people listening, but this is a show about investing, and we're kind of focusing on the investing aspect of it here. So at the risk of sounding like a heartless capitalist, if we do see the Strait remain limited in flow, because that's another important part of this. The US Navy is not blockading the Strait, they're blockading Iranian ports to be very specific about what's happening. So if we do see a limited flow continue for an extended period, companies like Cheniere Energy could be beneficiaries, other LNG exporters in North America, and also places like Australia that have large natural gas resources. You know, Rachel, you were naming off a lot of those feedstocks. And here's the thing. The reality is that prices are likely to be higher for those goods. Global shipping markets will adapt to where the supply is located, and that means that that could be beneficial for companies like Cheniere and others. Now the other thing too, I think maybe one of the long tail impacts is we could see domestic energy costs start to move higher if we do see more natural gas leave the US because generally it's just like a locally traded commodity that the price goes up and down based on weather. Like when it's really cold, the prices go up. When it's really hot, the prices go up because of the energy demands. But we're starting to see the fingers of macro global policy start to affect gas prices.

B (11:47)

And so what we're talking about right now is kind of the immediate impact of what this decision from the US could mean. But let's extend our time horizon just a bit because we are a long term investing group and we want to have that long term perspective always. So let's just extend the timeline here. I mean, what happens if this continues to drag on or what is going to happen now that the decision is made?

C (12:11)

I think if it drags on, I mean the immediate risk is that you see sort of this temporary crisis become a permanent part of our cost of living. And I mean some of cost inputs, even if it were all to reverse now, we might be seeing through the end of this year. But you kind of think of the global economy like a massive just in time conveyor belt. So when the Strait of Hormuz, which is obviously a literal choke point for this, is facing blockades, you know, more specifically in the Iranian ports, that belt stops. I mean, shipping companies are forced to take the long way around the tip of Africa. That adds weeks to travel time. There's obviously massive fuel costs. And those, you know, billions in extra expenses don't just disappear. They inevitably often get passed down to consumers in the price of cars, computers, household appliances, the list goes on. So over time there could be this situation where we are stopping, talking about a price spike and more about a global manufacturing stall where, you know, factories might struggle to get the raw materials they need when they need them. I think that still remains to be seen, John.

A (13:06)

There's so much of the focus right now on what happens in weeks to months out. But I think we're already in a situation where global commodities flows are going to be disrupted to some degree for years. There are reports of significant infrastructure damage King Qatar, for example, and in parts of Iran and Qatar that are kind of across some of the same areas. And we're at a point now with we could see a escalation of military action again. And if that happens, those hard assets that produce, store and move energy out of this part of the world they took decades to build. It could take years and billions of dollars to repair them. So that ties a lot to what Rachel was saying. But I think the thing that I'm really most interested about as an investor looking out in the future is there are always, I mean, the law of unintended consequences is a real thing. So I'm really curious, what is the thing that happens as a result of this war that none of us predicted or even really expected? My deepest hope, guys, is that it's something disruptive and positive for humanity.

B (14:09)

Yeah, it reminds me of Morgan Housel the future is surprising. And I think that there's a lot of things that we're just not thinking of today. And that's just how it works. After the break, we are getting to our mailbag. You're listening to Motley Fool Money.

D (14:24)

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B (14:56)

Fool Money with the Hidden Gems team. We want to make you a part of our conversation here. And so if you have a stock or an investing question for Jason, Rachel, myself or anyone else on the show, you can email us@podcastool.com and we would love to have mailbag segments like this whenever possible. So send in your questions. Remember to keep them foolish, please. But that email again is podcastool.com podcastool.com and on that note, we are closing today's show with a question from you, our listeners. This one comes from Garrett Campbell. He writes, hello, I've heard that The S&P 500 is considering a rule change to allow SpaceX to join without meeting the traditional requirements. I'm not knowledgeable on the IPO process and how shares become public and who owns shares. Can you discuss the pros and cons with granting an exception and allowing SpaceX to join the S&P 500 once it's public. Thank you, Garrett. And so there's actually a couple of things here in Garrett's question. First, I thought that maybe we would just speak quickly to the IPO process Garrett saying doesn't really know how the rules work here. So, Jason, can you just walk us through the IPO process and talk about basically whose shares investors are buying when it comes public?

A (16:17)

John, asking me to discuss anything quickly is a challenge in and of itself, but I'll do my best here. So the IPO process, you know, a company and its investment bank partners, they go around and meet with potential IPO investors and underwriters. This is the institutions that are actually buying the shares in the ipo. So, you know, you hear they're going to set a price, and then that IPO price is the price that those buyers and the underwriters are paying. In general, when a company ipos, the company is going to issue new shares for the ipo, so they're diluting the internal investors. They're creating these new shares that the IPO investors, the underwriters, buy, minus a fee, of course, to the banking partners, so the company gets the proceeds. This isn't always the case. I'm the company we're talking about that are looking to go public. Now, that that would be the case. They would be getting the proceeds. But it's not always the case. Sometimes we see a company that's part of a private equity business that gets IPO'd. A lot of times when that company IPOs the proceeds, they go to the PE firm. The PE firm is selling part of its stake, so the company doesn't get any additional liquidity, it's just going public. Right. So that's an important thing to remember. Sometimes you also have some insiders when a company IPOs that are also selling into the IPO. It's not always generally the case, but sometimes that's part of it. Usually you see insiders that have a lockup period that they can't actually sell for, you know, months, months and months after the fact. So that's roughly the way it works. Now, here's the thing. That's who's buying the IPO as retail investors, we're not buying from the company. When the stock debuts on the market and starts trading on the NASDAQ and the New York Stock Exchange, we are buying shares from those underwriters, Right? We're buying from the people that bought the ipo.

B (17:56)

Yeah, And I think that's such an important clarification there, Jason, that the IPO shares have already been sold at whatever the IPO price was. And then when we see that big pop on the initial trading, that's because some of those people who did buy are selling right Then and there to the people who are now retail investors on the market. Let's get to the main part now of Garrett's question. Basically, the rumor is that the S&P 500 considering tweaking the rules for SpaceX. And I just want to point out here before we go any further, this is unconfirmed and so this is just kind of conjecture. It's a rumor at this point. So we don't want to treat it as if this is gospel truth at this point. But I do want to speak to the question. Basically, Rachel, if the indexes are actually thinking of changing the rules here to include SpaceX stock early, which rules do they have to change here for this to happen?

C (18:46)

Yeah, so the reporting is that the S&P 500 would change its rules for SpaceX. This is an active proposal. Reportedly, it's not a done deal. You know, right now a company has to be public for a full year, show four straight quarters of profit before it could even be, you know, considered for the index. And SpaceX, the IPO is expected to be historical massive. And so reportedly that's the reason that S and P Dow Jones Indices is officially, you know, asking investors if they should ditch that one year seasoning period, if you will, for giant companies. And reporting is that they want the index to reflect the actual market immediately rather than waiting until 2027, presuming the IPO occurs this year to include what would be expected to be one of the world's most valuable firms. Now, it's actually interesting because NASDAQ actually just approved a new fast entry rule starting May 1st of this year. It allows a mega company to join the NASDAQ 100 just 15 days after its IPO. So if we saw the S and P Dow Jones indices follow suit, it would be a big shift in how they've operated for decades. And I think the goal is to make sure billions of dollars that would be sitting in passive index funds can start buying the stock right away. But we will have to see how this bears out.

B (19:53)

Okay, so hypothetically, let's say that S and P Global did change the rules here. Is there any benefit here, Jason, for the market, for investors?

A (20:04)

Yeah, Rachel and I actually agree on the downside, so I'm going to let her take that. But I do think there is some upside, a couple parts of it. First of all, I think it's more that the indices are starting to acknowledge the need to at least consider evolving with how the market for IPOs has changed. We're going to see more and More companies. We've already seen it happen where companies are staying private much longer. That means they're getting much larger, that means they're getting more stable. And I think that means that if we see a company go public that would normally be, would qualify for the S and P. Right. Large enough, but also four straight quarters of profitability and a clear path of remaining profitable, then it does make sense for it to get included a little bit earlier. Now what about that, like the NASDAQ 100 thing? That wasn't the question, but I'm going to answer it anyway. I do think that there's maybe reason to be a little more leery about that because there's no requirements around profitability for NASDAQ 100 companies. So if you have a giant AI startup like Anthropic that's still burning lots of money, go public and get pulled in, there is certainly more risk for investors in that sort of situation. But that's another show. Like I said, our listener wasn't asking about that one.

B (21:18)

Well, I mean, are you basically saying it might make a major index more volatile?

A (21:22)

Yeah, I think so. And it's. The NASDAQ 100 is already more volatile, so. Oh, hey, let's throw open AI in there too. What do you say? Oh, and, and SpaceX. So let's throw about, I don't know, two and a half trillion dollars worth of market cap.

B (21:35)

That, that could certainly be interesting. But Rachel, you're the one who's going to talk to the downside here. So what would be the downside of changing the rules?

C (21:42)

Yeah, I'm coming in with the negative angle here. Look, I do think that there are some downsides to consider. I think the biggest one is that changing these rules does create the risk of market distortion. You know, historically speaking, that one year waiting period, it acts as a cooling off phase, right? Allows the market to find a stable price for a new stock after that initial IPO hike fades. Certainly that has been a trend we've seen with a lot of these big tech companies that have gone public. By waiving this rule, index providers would very likely forced tens of billions of dollars in passive funds to buy SpaceX shares almost immediately. That could create a massive, potentially artificial surge in demand that could, you know, leave the stock at an unsustainable nosebleed valuation. That could also provide guaranteed high priced exits for early insiders. And everyday retail investors could be more vulnerable if the price were to then have an inevitable crash once that initial buying frenzy ends. Obviously that's sort of the the worst case scenario there. But I do think it's important to consider and be aware of both sides of this equation. If in we do see those rules change, I think for now it's more of a wait and seeking.

A (22:46)

Yeah, I think. I think that's right. I'll just add one thing here, just as a food for thought. Let's say SpaceX goes public so large that it's 5% of the S&P 500. Let's say that happens and it falls by 50% in the first year. That's only a 2 1/2% haircut for investors in those indices. It's not nothing, but it's also not the end of the world.

B (23:06)

Well, either way, we are going to look forward to the SpaceX IPO with great anticipation. Garrett, thank you so much for the question. And to the fools out there listening, we hope that you get more questions like that in in future episodes. That's all we have time for today. As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show Notes. Thanks to our producer, Bart Shannon and the rest of the Motley fool team for Jason Hall, Rachel Warren and myself. Thank you so much for taking time to listen to our show today and we'll see you in the next episode.